Edited version of private advice

Authorisation Number: 1051541951618

Date of advice: 29 August 2019

Ruling

Subject: Lump sum payment from foreign fund

Question 1

Is the Fund a foreign superannuation fund as defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes

Question 2

Is any portion of the lump sum payment received from the Fund assessable as 'applicable fund earnings' under section 305-70 of the ITAA 1997?

Answer 2

Yes.

This ruling applies for the following period:

Income year ended 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

The Taxpayer was employed by a foreign employer between the years of 1987 to 1989.

During the Taxpayer's period of employment, the Taxpayer was a member of the Fund.

The Fund is an occupational pension plan.

The Fund retains amounts on behalf of its members until they become eligible to receive a pension. A pension may be payable to a member where:

·        the member achieves pension age (commonly 60 years of age, unless stated otherwise but no earlier than 55 years of age); or

·        upon the death of a member.

In 1993 the Taxpayer became a resident of Australia.

There have been no contributions to the Fund since the Taxpayer migrated to Australia.

In 2019, an amount was transferred from the Fund to an Australian complying superannuation fund. The Taxpayer has no further interest in the Fund.

There are no previously exempt fund earnings in relation to the lump sum.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 295-95(2).

Income Tax Assessment Act 1997 section 305-70.

Income Tax Assessment Act 1997 subsection 305-75(2).

Income Tax Assessment Act 1997 subsection 305-75(3).

Income Tax Assessment Act 1997 section 305-80.

Income Tax Assessment Act 1997 section 960-50.

Income Tax Assessment Act 1997 subsection 995-1(1).

Superannuation Industry (Supervision) Act 1993 section 10.

Superannuation Industry (Supervision) Act 1993 section 62.

Reasons for decision

Meaning of 'foreign superannuation fund'

A foreign superannuation fund is defined in subsection 995-1(1) of the ITAA 1997 as follows:

(a) a superannuation fund is a foreign superannuation fund at a time if the fund is not an Australian superannuation fund at that time; and

(b) a superannuation fund is a foreign superannuation fund for an income year if the fund is not an Australian superannuation fund for the income year.

Subsection 295-95(2) of the ITAA 1997 defines Australian superannuation fund as follows:

A superannuation fund is an Australian superannuation fund at a time, and for the income year in which that time occurs, if:

(a) the fund was established in Australia, or any asset of the fund is situated in Australia at that time; and

(b) at that time, the central management and control of the fund is ordinarily in Australia; and

(c) at that time either the fund had no member covered by subsection (3) (an active member) or at least 50% of:

(i) the total market value of the fund's assets attributable to superannuation interests held by active members; or

(ii) the sum of the amounts that would be payable to or in respect of active members if they voluntarily ceased to be members;

is attributable to superannuation interests held by active members who are Australian residents.

Thus, a superannuation fund that is established outside of Australia and has its central management and control outside of Australia would qualify as a 'foreign superannuation fund'. The fact that some of its members may be Australian residents would not necessarily alter this.

Meaning of 'superannuation fund'

'Superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 as having the same meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA).

Subsection 10(1) of the SISA states:

superannuation fund means:

(a) a fund that:

(i) is an indefinitely continuing fund; and

(ii) is a provident, benefit, superannuation or retirement fund; or

(b) a public sector superannuation scheme.

The High Court examined both the terms superannuation fund and fund in Scott v Commissioner of Taxation of the Commonwealth (No. 2) (1966) 10 AITR 290; (1966) 40 ALJR 265; (1966) 14 ATD 333 (Scott). In that case, Justice Windeyer stated:

...I have come to the conclusion that there is no essential single attribute of a superannuation fund established for the benefit of employees except that it must be a fund bona fide devoted as its sole purpose to providing for employees who are participants money benefits (or benefits having a monetary value) upon their reaching a prescribed age. In this connexion "fund", I take it, ordinarily means money (or investments) set aside and invested, the surplus income therefrom being capitalised. I do not put this forward as a definition, but rather as a general description.

Meaning of 'provident, benefit, superannuation or retirement fund'

The issue of what constitutes a provident, benefit, superannuation or retirement fund was discussed by the Full Bench of the High Court in Mahony v Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967) 14 ATD 519 (Mahony). In that case, Justice Kitto held that a fund had to exclusively be a 'provident, benefit or superannuation fund' and that 'connoted a purpose narrower than the purpose of conferring benefits in a completely general sense...". This narrower purpose meant that the benefits had to be 'characterised by some specific future purpose' such as the example given by Justice Kitto of a funeral benefit.

Furthermore, Justice Kitto's judgement indicated that a fund does not satisfy any of the three provisions, that is, 'provident, benefit or superannuation fund', if there exist provisions for the payment of benefits 'for any other reason whatsoever'. In other words, though a fund may contain provisions for retirement purposes, it could not be accepted as a superannuation fund if it contained provisions that benefits could be paid in circumstances other than those relating to retirement.

In accordance with section 62 of the SISA, a regulated superannuation fund must be maintained solely for one or more of the 'core purposes'; or for one or more of the core purposes and for one or more of the 'ancillary purposes'.

For the purposes of section 62 of the SISA, 'core purposes' means the provision of benefits:

·        on or after retirement from gainful employment; or

·        on attaining a prescribed age; or

·        on the member's death if the death occurred before the member's retirement or attaining the prescribed age.

In accordance with paragraph 62(1)(b) of the SISA, 'ancillary purposes' means:

·        the provision of benefits on or after termination of member's employment with an employer who had at any time contributed to the fund in relation to the member; or

·        provision of benefits on or after cessation of work on account of ill-health; or

·        provision of benefits on member's death if the death of the member occurred after member's retirement.

Notwithstanding the SISA applies only to 'regulated superannuation funds' (as defined in section 19 of the SISA), and foreign superannuation funds do not qualify as regulated superannuation funds as they are established and operate outside Australia, the Commissioner views the SISA (and the Superannuation Industry (Supervision) Regulations 1994 (SISR)) as providing guidance as to what 'benefit' or 'specific future purpose' a superannuation fund should provide.

In view of the legislation and the decisions made in Scott and Mahony, the Commissioner's view is that for a fund to be classified as a superannuation fund, it must exclusively provide a narrow range of benefits that are characterised by some specific future purpose. That is, the payment of superannuation benefits upon retirement, invalidity or death of the individual or as specified under the SISA and the SISR.

In the present case, the Fund allows withdrawal of benefits when members reach retirement age, or meet the definition of permanent incapacity, or death. The Fund is set up for the express purpose of providing for the payment of benefits in the nature of superannuation.

Based on the above, the Fund meets the definition of superannuation fund as funds are ordinarily only obtainable once the member reaches retirement age and early or special access provisions effectively mirror those of Australian legislation. In addition, it is clear the Fund is established outside of Australia with its central management and control outside of Australia. Therefore, on this basis, together with the above, the Commissioner considers the Fund to be a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Applicable fund earnings

The 'applicable fund earnings' amount is worked out under section 305-75 of the ITAA 1997. As the Taxpayer became an Australian resident after the start of the period to which the lump sum relates, the applicable fund earnings are worked out in accordance with subsection 305-75(3) of the ITAA 1997 which states:

If you become an Australian resident after the start of the period to which the lump sum relates (but before you received it), the amount of your applicable fund earnings is the amount (not less than zero) worked out as follows:

(a) work out the total of the following amounts:

(i) The amount in the fund that was vested in you just before the day (the start day) you first became an Australian resident during the period;

(ii) the part of the payment that is attributable to contributions to the fund made by or in respect of you during the remainder of the period;

(iii) the part of the payment (if any) that is attributable to amounts transferred into the fund from any other *foreign superannuation fund during the remainder of the period;

(b) subtract that total amount from the amount in the fund that was vested in you when the lump sum was paid (before any deduction for *foreign income tax);

(c) multiply the resulting amount by the proportion of the total days during the period when you were an Australian resident;

(d) add the total of all previously exempt fund earnings (if any) covered by subsections (5) and (6).

The effect of section 305-75 of the ITAA 1997 is that the Taxpayer is assessed only on the income they earned on their benefits in the foreign Fund during the relevant period. Earnings made during periods of non-residency, contributions, and transfers into the paying fund do not form part of the taxable amount when the overseas benefit is paid.

Foreign currency conversion

Subsection 960-50(1) of the ITAA 1997 states that an amount in a foreign currency is to be translated into Australian dollars. The applicable fund earnings is the result of a calculation from two other amounts and subsection 960-50(4) of the ITAA 1997 states that when applying section 960-50 of the ITAA 1997 to amounts that are elements in the calculation of another amount you need to:

·        first, translate any amounts that are elements in the calculation of other amounts (except special accrual amounts); and

·        then, calculate the other amounts.

In ATO Interpretative Decision ATO ID 2015/7 Income tax/Superannuation: Foreign currency translation rules in working out 'applicable fund earnings' under section 305-75 of the ITAA 1997, the Commissioner considered the foreign currency translation rules in relation to lump sum transfers from foreign superannuation funds. The Commissioner determined that it is reasonable to use the exchange rate applicable at the time of receipt of the lump sum to work out the Australian dollar equivalent of the amount in a foreign superannuation fund vested in a taxpayer on a certain date.

Therefore, for the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' amount in respect of the lump sum received from the Fund should be calculated by deducting the Australian dollar equivalent of the amount vested in the Taxpayer just before their residency date from the amount vested in the Taxpayer on the day of receipt. Both amounts should be translated using the exchange rate applicable on the day of receipt.

Election

According to section 305-80 of the ITAA 1997, a taxpayer who is transferring their overseas superannuation benefits directly to an Australian complying superannuation fund is able to elect to have the Australian superannuation fund pay the tax on the applicable fund earnings if the taxpayer no longer has an interest in the overseas fund immediately after the payment.

As the Taxpayer no longer has an interest in the Fund, they are eligible to make the election in relation to the lump sum transfer.

If an election is made, the elected amount will be assessable to the superannuation fund and subject to tax at 15% rather than being assessable to the Taxpayer and subject to tax at the Taxpayer's marginal tax rate.